THE DEMOCRATIZATION OF DIVERSIFICATION: HOW EXCHANGE-TRADED FUNDS (ETFs) ARE TRANSFORMING INVESTMENT STRATEGIES (original) (raw)
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Future business journal, 2024
Passive investments such as exchange-traded funds (ETFs) provide an opportunity to invest in indexes, asset classes, and sectors with low maintenance costs and high transparency. Today ETFs dominate the world, with nearly 50% of the investment in the USA coming through ETFs. Numerous studies on specific aspects on ETFs have been done earlier; however, considering the scarcity of thorough summaries in the existing body of literature, this bibliometric and systematic review aims to adopt a methodical approach with the goal of delivering qualitative and quantitative understanding of ETFs, while highlighting general research trends. The authors analyzed 2058 articles associated with ETFs from the Scopus database during the last 50 years, i.e., from 1973 till date. The search was initially conducted using title, keyword, and abstract, yielding 2058 articles, which were narrowed to only include research papers and review papers, resulting in a final count of 958 items. The most important authors, highest cited articles, prominent journals, important themes, and associated countries have been identified using bibliometric research. The numerical and visual representations of the analysis show that ETFs are a widely studied research area, and the enormous rise in publications in 2020, 2021, and 2022 demonstrates that researchers are quite interested in the topic. According to affiliation statistics, most research is focused in the USA together with other developed nations, opening new options for the research on ETFs in relation to developing economies. The current analysis reconciles numerous exchange-traded fund studies associated with volatility, liquidity, risk-return trade-off, and tracking errors and identifies possible research gaps. Some of the emerging topics that evolved in passive investments include the use of machine learning, AI, and the emergence of ETFs associated with ESG and sustainability. This research will help lawmakers, scholars, and regulators understand the core principles of ETFs and identify areas that deserve additional investigation.
Two Essays on the Information Embedded in Flow of Exchange-Traded Funds (ETFs)
2021
An exchange-traded fund (ETF) is a pooled investment vehicle with shares similar to common equities, and it can be bought or sold on the stock exchanges. As more money flow into an ETF, its assets increase as do the number of shares outstanding. The demand for ETFs, especially after the 2008 crisis, has grown remarkably in the United States. Features such as intraday tradability, tax efficiency, low fees, and transparency have contributed to the ETFs' appeal to investors. According to Bloomberg terminal data, as of January 2021, there were 2584 U.S.-registered ETFs, with over $5.5 trillion assets under management. Recent studies have stressed the role of passive investing and its importance in the financial markets. Several lines of evidence in recent studies suggest that institutions play a role in nonfundamental demand shocks on their underlying securities (Ben‐David et al., 2018; Coval & Stafford, 2007; Etula, Rinne, Suominen, & Vaittinen, 2020; Lachance, 2020; D. Lou, 2012)....
The effect of ETFs on financial markets: a literature review
Financial Markets and Portfolio Management, 2020
Exchange-traded funds (ETFs) belong to the fastest growing investment products worldwide. Within 15 years, total assets invested in ETFs have twenty-folded, reaching over $3.7 trillion at the end of 2018. Increasing demand for passive investments, coupled with high liquidity and low transaction costs, are key advantages of ETFs compared to their closest substitutes such as traditional index funds. Besides the continuous growth of ETFs, the Flash Crash in 2010 triggered detailed investigations by regulators on how ETFs affect the financial market. This literature review provides a broad overview of recent academic studies analyzing the effect of ETFs on liquidity, price discovery, volatility, and comovement of the underlying securities.
The effect of ETFs on financial markets
2019
Exchange-traded funds (ETFs) belong to the fastest growing investment products worldwide. Within 15 years, total assets invested in ETFs have twenty-folded, reaching over $3.7 trillion at the end of 2018. Increasing demand for passive investments, coupled with high liquidity and low transaction costs are key advantages of ETFs compared to their closest substitutes such as traditional index funds. Besides the continuous growth of ETFs, the Flash Crash in 2010 triggered detailed investigations by regulators on how ETFs affect the financial market. This literature review gives the reader a broad overview of recent academic studies analysing the effect of ETFs on liquidity, price discovery, volatility and comovement of the underlying securities.
2016
The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
The performance and trading characteristics of exchange-traded funds
This study examines the performance and trading characteristics of exchange-traded funds (ETFs) in Australia. We investigate the ability of index oriented (classical) ETFs to track underlying equity benchmarks on the Australian Stock Exchange, and provide a comparison of the tracking error volatility between these types of market-traded instruments and equity index funds operated off-market. Our study finds that while index-oriented ETFs closely track their respective benchmarks, these instruments have not been embraced to the same extent as in overseas markets, and relative to off-market index managed funds. Our research provides an important comparison of classical ETFs between Australia and the United States.
The Dark Side of ETFs and Index Funds
Do popular investment products such as passive ETFs and index funds benefit individual investors? Using data from one of the largest brokerages in Germany, we find that retail investors worsen their portfolio performance after using these products compared with non-users. As these securities make market timing easier, we investigate whether this decrease in portfolio performance of the users is primarily due to bad market timing. Our answer is yes.
THE IMPACT OF ETFs AND INDEX FUNDS ON THE STOCK MARKETS, 2019
The purpose of this research is to shed light on a more and more relevant reality, which has largely developed during the last two decades: the ascendance of ETFs and Index Stock Funds. Through the paper will be broken down the impact of these two vehicles of investment on stock market liquidity as well as the effects that passive investing produces on the underlying assets prices. The main focus is emphasizing the theoretical implications of passive investing related academic research. First chapter will concede wide space to describe the structure and the working process behind the funds, deepening the peculiar “creation-redemption” process of ETFs, the arbitrage process and their pro and cons relative to the active investment vehicles available on the market. Chapter two analyse how ETFs and Index Funds growth can undermine individual securities liquidity, impact on underlying stocks volatility and affect stock market efficiency. The last part provides personal and objective considerations with regards to the present, and the future, trying to define a conscious outline of the topic offering some points of reflection.
The impact of etfs and index funds on the stock markets
2019
Finance and investing are developing faster than ever, making the complex money machine hard to understand. The last two and half decades saw a completely new way of deploying cash that satisfied the necessity of small investor of having access to low cost tools for managing savings. Born in the early 90s passive funds such as ETFs and Index Stock Funds progressively took place into the market, changing the rules, the burdens and the boundaries of the game offering a new investment landscape, trading flexibility and the advantages of pooled capital raise. The chapter describes the two passive funds, breaking down the running process and the core features that characterize ETFs and Index Funds. 1.1.1 ETFs An ETF is an open investment fund listed on a stock exchange which tracks a benchmark-that might be an index or a specific basket of securities-by purchasing the same underlying assets and rebalancing the portfolio whenever the referred benchmark changes. These passive instruments are made up by a sponsor company that manages the creation-redemption process. The latter is completely different from mutual fund's one: mutual funds pool money from investors who subscribe fund quotes; then the sponsor company deploys investor's cash to acquire the individual securities from the market. ETFs do not receive retail investors' cash; they instead exchange fund shares for the individual securities-which will compose the underlying basket-with a provider called Authorized Participant 1. The latter is whom actually deals with retail investors and savers; it places ETF shares within the stock exchanges and receive cash in return 2. The creation-redemption process happens on the primary market whereas the trading activity happens on the secondary market. To ensure the running process works properly, the sponsor firm relies on one or more APs. In some case the AP and the issuer might coincide 3. The sponsor firm does not need to undertake neither the asset management nor the stock picking. It just simply tracks the reference benchmark and adjust its holding whenever 1 AP is an institutional firm, traditionally large banks or market makers, that is responsible for helping the sponsor of the ETF in the creation-redemption process (it is not legally obliged) through providing the underlying securities. Moreover, the AP is in charge of maintaining the market price of the ETF and the NAV aligned. To do so APs resort to the arbitrage process (it will be explained in point 1.2.2.) APs are the ones who are allowed to deal directly with the funds.
The buy and hold stock market strategy, which gained tremendous popularity in the 1970s, may no longer be such a profitable method for accumulating wealth for the average investor in the new millennium. This paper investigates the relationship between compound return and holding period length to see how long an Exchange Traded Fund (ETF) investment must be held before a positive return on principal is 100% likely. Because the ETF is a relatively new investment vehicle that could be considered particularly well-suited to the requirements of the buy and hold strategy, we begin our investigation here. We find that the compound returns earned over a rolling holding period are much more volatile than one might assume given historic rules of thumb for average return expectations. Using monthly return data for all listed NASDAQ ETFs between their date of inception and 2015, we find it takes ten years for the average probability of a gain on principal to be over 95 percent.